The continued downturn in the credit cycle, combined with lingering weakness in financial markets and falling asset values, had a pronounced negative effect on banking industry performance in the second quarter. Insured commercial banks and savings institutions reported net income of $5.0 billion for the second quarter of 2008. This is the second-lowest quarterly total since 1991 and is $31.8 billion (86.5 percent) less than the industry earned in the second quarter of 2007. Higher loan-loss provisions were the most significant factor in the earnings decline. Loss provisions totaled $50.2 billion, more than four times the $11.4 billion quarterly total of a year ago. Second-quarter provisions absorbed almost one-third (31.9 percent) of the industry's net operating revenue (net interest income plus total noninterest income), the highest proportion since the third quarter of 1989. A year ago, provisions absorbed only 7.3 percent of industry revenue. The average return on assets (ROA) in the second quarter was 0.15 percent, compared to 1.21 percent a year earlier. Large institutions as a group had more substantial earnings erosion than smaller institutions, but downward earnings pressure was widely evident across the industry. At institutions with assets greater than $1 billion, the average ROA in the second quarter was 0.10 percent, down from 1.23 percent a year ago. At institutions with less than $1 billion in assets, the average second-quarter ROA was 0.57 percent, compared to 1.10 percent in the second quarter of 2007. More than half of all insured institutions (56.4 percent) reported year-over-year declines in quarterly net income, and almost two out of every three institutions (62.1 percent) reported lower ROAs. Almost 18 percent of all insured institutions were unprofitable in the second quarter, compared to only 9.8 percent in the second quarter of 2007.
Let's take this piece by piece
The continued downturn in the credit cycle, combined with lingering weakness in financial markets and falling asset values, had a pronounced negative effect on banking industry performance in the second quarter.
An old rule of writing is, "tell them what you're going to tell them, tell them, and then tell them what you told them." This is the opening line -- and it is terrible. We know nothing good is coming.
Insured commercial banks and savings institutions reported net income of $5.0 billion for the second quarter of 2008. This is the second-lowest quarterly total since 1991 and is $31.8 billion (86.5 percent) less than the industry earned in the second quarter of 2007.
Earnings are down -- big time. This is the second lowest net income we've seen since 1991 -- that's over 15 years. In addition, earnings are dropping hard on a year over year basis, indicating the problems are not getting better but are getting worse.
Higher loan-loss provisions were the most significant factor in the earnings decline. Loss provisions totaled $50.2 billion, more than four times the $11.4 billion quarterly total of a year ago
The biggest reason things are getting worse is banks are preparing for higher losses from more bad loans. Loan loss provisions are increasing four-fold. That's a tremendous increase.
Second-quarter provisions absorbed almost one-third (31.9 percent) of the industry's net operating revenue (net interest income plus total noninterest income), the highest proportion since the third quarter of 1989. A year ago, provisions absorbed only 7.3 percent of industry revenue.
33% of the industry's second quarter revenue went to loan loss reserves. That's the most since the end of the S&L crisis.
The average return on assets (ROA) in the second quarter was 0.15 percent, compared to 1.21 percent a year earlier.
Put another way -- banks are barely making any money on any of their assets.
More than half of all insured institutions (56.4 percent) reported year-over-year declines in quarterly net income, and almost two out of every three institutions (62.1 percent) reported lower ROAs.
The losses (and subsequently the problems) within the insured bank industry are wide-spread.
Let's look at some pertinent charts from the report:
The non-current loan and charge off rate is higher than at any time in the last 14 years. And the number is clearly increasing, indicating we're nowhere near the end of this.
Real estate loans are a big reason for the problems. People are defaulting in droves. Again -- the number is increasing, indicating we're nowhere near the bottom of this.
The default rate on home loans is increasing as well.
And that's not all:
The U.S. Federal Deposit Insurance Corp. said its ``problem list'' of banks increased 30 percent in the second quarter to the highest total in five years as more commercial real-estate loans were overdue.
The list had 117 banks as of June 30, up from 90 in the first quarter and the highest since mid-2003, the agency said today in its quarterly report without naming any institutions. FDIC-insured lenders reported net income of $4.96 billion, down 87 percent from $36.8 billion in the same quarter a year ago.
``More banks will come on the list as credit problems worsen,'' FDIC Chairman Sheila Bair said at a news conference in Washington.
As a result:
Federal Deposit Insurance Corp. Chairman Sheila Bair said Tuesday her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures.
Ms. Bair said the borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank. The borrowed money would be repaid once the assets of that failed bank are sold.
The last time the FDIC borrowed funds from Treasury came at the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks were shuttered. That the agency is considering the option again, after the collapse of just nine banks this year, illustrates the concern among Washington regulators about the weakness of the U.S. banking system in the wake of the credit crisis.
None of this should be surprising.
Let's tie all of this together.
The charts from the latest QBP indicate the trend in real estate related loans is or further deterioration. As a result, we can expect the FDIC's list of problem banks to grow, which will force the FDIC to ask the Treasury for more money. This at a time when the Treasury has been given an unfettered line of credit to pump into Fannie and Freddie.
The Treasury will be writing an awful lot of checks in the coming quarters.
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